SMEs stick with high street banks despite better rates elsewhere

Business owners are more likely to opt for traditional high street banks over challenger outfits even when they offer preferable interest rates, according to new research from savings account platform Flagstone.

The survey of 500 UK SMEs, first published in ecommerceweek, looked at participating firms’ saving habits and found that 73% of those interviewed save mostly or entirely with high street banks, compared to just 13% choosing challenger banks exclusively. 

Financial hit

The results, which included analysis of instant-access and fixed-term products from four large high street banks and four challenger banks, revealed that SMEs are likely to stick with high street banks even when interest rates are lower. 

According to Flagstone, challenger banks offer “higher average rates in every category”. For instant-access accounts, this equated to an average rate of 3.87% from a challenger bank compared to 1.15% from a high street bank. 

When six-month fixed-term accounts were compared, the challenger banks came up with average rates of 3.8% versus 2.25% on the high street. The figures for 12-month fixed terms were 2.60% and 3.95%, respectively. 

Flagstone estimates that a micro business with £66,232 (in instant-access cash) will lose out on £1,801.51 a year in interest by sticking with a traditional bank. 

For small businesses (£224,673 in instant-access reserves), this is a £3,482.43 annual shortfall and for mid-sized businesses (£620,734 in instant-access reserves), it would be as high as £8,379.91 per annum.

Trust issues

Despite these potential financial boons, businesses are staying with high street providers because they don’t want the hassle of switching, and they trust what they’re familiar with. 

Indeed, nearly two-thirds of those who took part admitted that they are using their high street bank because they view it as the safe option. This is despite criticism from the Government that banks are not doing enough for our SMEs, especially when it comes to competitive lending. 

A group of Labour backbenchers has even put together a bill that would force banks to be held accountable for how they work with SMEs and be ranked for their efforts. 

As former business minister Gareth Thomas wrote on LabourList: “Thousands of small and medium-sized businesses are currently locked out of the finance they need to grow. Entrepreneurs without long track records or significant assets often find the door to mainstream banking closed. Too many are left without advice, support or a fair chance to turn good ideas into thriving businesses.” 

The operative motivation, however, is safety. Three-quarters of founders say they put protecting their money above maximising returns, while more than half of those interviewed said that they would not move banks for higher rates alone. 

68% said that they would indeed move to a challenger bank, but only if they had more confidence in their record. 

As Lakhbir Sandhu, Chief Financial Officer at Flagstone, said: “When the vast majority of UK businesses continue to favour traditional banks despite rate competition driven by challenger banks, it sends a clear signal: rates alone aren’t enough to encourage businesses to change their savings habits.”